I agree. I will be surprised if the S&P 500 ends up on the positive side for this year. A lot will depend on whether the Fed continues to manipulate the market with more QE stuff (round 4?), or not. It has to end at some point.

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Definitely, the world wealth keeps on increasing. But while it blooms here, it wilts there.

Yes, globalization changes a lot of things. The issue is how we should react to these changes. Your last sentence suggests that we do not need to change much, and can stay US-centric in our investment choices. Perhaps you are right. Just recently, there was an article showing the correlation between international stocks and US stocks is getting stronger and stronger.

But the underlying problem remains: the world-wide economy and stock markets evolve, and even to say that as things change they are self-compensating requires some analysis, not just arm-waving and ignoring the question.

__________________"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky

I just let the market pricing decide. My international allocation switches between US and international and has been mostly in US over the last 4 years. Probably no coincidence that the dollar has been in an uptrend over the last 3+ years.

Yes, globalization changes a lot of things. The issue is how we should react to these changes. Your last sentence suggests that we do not need to change much, and can stay US-centric in our investment choices. Perhaps you are right. Just recently, there was an article showing the correlation between international stocks and US stocks is getting stronger and stronger.

Equity only investor would do quite well with for example 50% VTI and 50% VXUS. That's it. As simple as that.

The rest is having plan, stick with it, discipline, LBYM, stay away from timing....and add and add and add as years go by.

Algorithm:
Each month:
If VTI is below 50% add to VTI else add to VXUS.

That would give you portfolio with about 2.5% yield so at 2 million you are looking at 50k annual "qualified" dividend TAX FREE from federal government.

But the underlying problem remains: the world-wide economy and stock markets evolve, and even to say that as things change they are self-compensating requires some analysis, not just arm-waving and ignoring the question.

If I try to be smarter than 50% VTI/50% VXUS I risk that I will in fact be stupider and make bad decisions. And indeed this is what most people end up doing.

With simple strategy I take no risks and I know I will do quite well. But I need to resist temptations that I am smarter then that....

So i elect arm-waving and ignoring if AAPL will do great or Europe will have 2 terrible years.

The problem with using the Kelly criterion for investing is that you don't neccessarily know the probability of winning or whether an asset is "on sale".

If stocks go down because their earnings power is impaired, that is not a reason to increase your holdings. If they go down because of irrational fear, it is a reason to increase your holdings. In practice, it is very difficult to tell the difference.

My general point is that the number of trials to separate luck out from skill in poker or active investing is very large, and the game itself is changing in the meantime. In practice, I don't think most people will ever really know with any confidence which led to their outperformance (or underperformance).

It's somewhat easier in poker, because you can analyse individual hands after the fact and come up with your true chances for winning and losing a hand, and figure out if you played that same hand 1000 times what your expected win/loss rate would be.

With stocks, you can't really do that. When a company starts having troubles and the stock goes down, what are the odds of it turning things around? Those odds are unique for each company, and they aren't something that can really be calculated. Ultimately, you're just making educated guesses, and there is no way to know what the odds really were, regardless of how it actually turns out.

Buffett's margin of safety is an acknowledgement of how hard it is to be precise about investing. He tries to find situations that aren't even close, so that even if his judgement is quite a bit off the mark he still won't lose money. Those situations are pretty hard to find though, and come up infrequently enough that you end up wondering if it really was just luck.

Quote:

Originally Posted by NW-Bound

I am not a poker player, but understand that the game or some variations of it involves bluffing, reading the opponent's reaction, etc... So there's skill involved. Other card games may be just like slot machines, i.e., all pure chance.

Regarding investing, I should have been more specific and talk about "active investing" and not "trading", as the latter term implies quickly jumping in/out or day trading. The quicker you buy and sell, the more it looks like a pull of the lever of the slot machines.

Kelly criterion, if anyone cares to read the article, says that the optimal bet size varies with the probability of winning. You increase your bet when the chance is higher, and decrease it when it does not look as good. Applying it to investments, you would increase the bet when a particular asset is on sale, and decrease the bet when it has been on the run. You do not go 100% one way or another, because how can you be sure of anything?

Applying Kelly criterion requires you to increase stock AA when the market goes down, and lower stock AA when the market runs hot. This is hard to do when the average investor has enough trouble maintaining constant AA.

If I try to be smarter than 50% VTI/50% VXUS I risk that I will in fact be stupider and make bad decisions. And indeed this is what most people end up doing...

I stay fairly diversified too. Using the Kelly mathematical criterion, one only puts 100% on a bet when he is 100% certain that it will pay off. Too many random things happen in real life, and only fools can be 100% certain of anything (other than facts like the sun rising in the east or 2+2=4, of course). Actually, the average Joe intuitively knows not to "go for broke" or "going all in", and he never hears about Kelly criterion. It's common sense.

This talk of diversification brings us back to the question of outperforming the market. Any fool can beat the market for a day, a week, one year. There is enough randomness to guarantee that. And it is not possible for anyone to beat the market every single year. How can one beat the market during the bubble years? Going on margin in 1999 and early 2000? One can only outperform a crazy market by being crazier. So, the period of measurements has to be longer, like 5 or 10 years.

Many value MF managers in the past beat the market when measured over periods of one, two, or three decades, but the EMH proponents still say that is not enough. They usually point to the coin-tossing monkey argument, and say that there will always be a lucky monkey if we add more monkeys.

And the longer the period, the more monkeys they will bring in to the argument. By that definition, they will never be satisfied that anyone can beat the market, because they do not run out of monkeys, but an investor has a limited life.

In fact, some even say that there is not enough evidence to prove that Buffett is not a lucky guy. I am serious. This for a guy with an investing career of 60 years!

Quote:

Originally Posted by Hamlet

The problem with using the Kelly criterion for investing is that you don't neccessarily know the probability of winning or whether an asset is "on sale"...

True. The market is not a textbook game where one can determine the chances a priori. What one can do is to apply it heuristically: increase stock AA during a downturn, and decrease it after a good run. If the stock is truly a random walk, then the above would not work (in fact if the stock movement is a mathematical random-walk like a coin toss, one has to be a fool to play). The simple explanation is that after a crash, the market has a higher probability to go up than down. The converse is true after a good run. It is just a probability, never a certainty, hence you cannot go all in/all out.

But as I said, maintaining AA in a down turn is already plenty hard. Buying more stocks is beyond what most people have the stomach for, but afterwards we all say "woulda, shoulda".

__________________"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky

And that is one of the hardest things about stuff like this. You can't really prove Buffett wasn't just lucky. He chose a very concentrated portfolio. Sure, he's invested for 60 years, but you can probably distill a large portion of his success to less than two dozen investments that turned out really well. Given the massive numbers of people investing, you would expect some pretty amazing outliers using that investment method just given chance alone.

Do I think it was just luck? Nope. I find his explanation of his investing choices over the years to be pretty compelling. However, I think luck was certainly involved. GEICO could have gone bankrupt. The Buffalo News could have been prevented from having a Sunday paper indefinately by the courts. People could have lost faith in American Express during the Salad Oil Scandal. Solomon Brothers could certainly have gone under if Buffett hadn't managed to get the Feds to allow them to continue. Etc, etc.

How much of his performance was luck and how much was skill? It's a question that can't be answered. I think both are non-zero, but I also think the luck factor is bigger than most people think.

Quote:

Originally Posted by NW-Bound

Many value MF managers in the past beat the market when measured over periods of one, two, or three decades, but the EMH proponents still say that is not enough. They usually point to the coin-tossing monkey argument, and say that there will always be a lucky monkey if we add more monkeys.

And the longer the period, the more monkeys they will bring in to the argument. By that definition, they will never be satisfied that anyone can beat the market, because they do not run out of monkeys, but an investor has a limited life.

In fact, some even say that there is not enough evidence to prove that Buffett is not a lucky guy. I am serious. This for a guy with an investing career of 60 years!

Aren't we all here because of luck? And I'm not going to invoke some higher power explanation here. Why did this spherical mass we live on get the atmosphere to sustain life? Probably just luck that we evolved as we are now at this very moment. And Buffet, he's said that he was lucky to be born at a period in time where his talents could be utilized. Maybe in a few thousand years there will be a much higher percentage of Buffet minds. But the markets will be so evolved in those years that Buffet's mental advantages will be almost impossible to duplicate.

I'm personally turned off by the extreme uses (not mild statistical arguments) of the "luck explanation" when it comes to investing. Not saying Hamlet is guilty of this. But others quite often use luck as a justification for one form of investing as the only way to do things. I've seen it used here and at Bogleheads in some outrageous ways.

There have been a couple of concurrent threads about ER's being lucky. And another poll reconfirms what long-timers here have known for a long time, that a high percentage of ER's are of the INTJ personality. Perhaps it's all due to luck that they have the INTJ gene.

About Buffett, there is no way he would let Geico get into the subprime business like AIG. In fact, I remember the earlier episode, perhaps in late 2007 when the words were out that some financial corps were in trouble due to leveraging and lack of liquidity, Buffett laughed in an interview and said that only when the tide was out that we would know who had been swimming naked.

And later, when one after another corp went belly up, they asked him if the carnage was over, if the last shoe had dropped. Again, he laughed and said that we could be dealing with a centipede here.

I really like Buffett's sense of humour.

__________________"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky

GEICO isn't going to go bankrupt now, but when Buffett first bought stock it was in severe distress. Bankruptcy was a definate possibility at that time. One of his biographies quotes him as saying at the time that he had put huge money into something that could go under tomorrow. It didn't, but it could have. If it had, his investing performance would have been impacted dramatically. He would still have been successful, but he might not be famous.

Quote:

Originally Posted by NW-Bound

There have been a couple of concurrent threads about ER's being lucky. And another poll reconfirms what long-timers here have known for a long time, that a high percentage of ER's are of the INTJ personality. Perhaps it's all due to luck that they have the INTJ gene.

About Buffett, there is no way he would let Geico get into the subprime business like AIG. In fact, I remember the earlier episode, perhaps in late 2007 when the words were out that some financial corps were in trouble due to leveraging and lack of liquidity, Buffett laughed in an interview and said that only when the tide was out that we would know who had been swimming naked.

And later, when one after another corp went belly up, they asked him if the carnage was over, if the last shoe had dropped. Again, he laughed and said that we could be dealing with a centipede here.

Buffett does not always make the right call, and he often admits to his errors publicly. And some close calls might have cost him dearly as you said, and might have bumped him from being among the top 5 richest men in the world.

So, there is an element of luck alright. But it is the same as an athlete getting the gold medal at the Olympics. Lucky or not, they are head and shoulder among the peers, let alone the average weekend biker or runner.

__________________"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky

I wouldn't dream of doing something like Buffett did. Where was he when he was your age? What he has now, if I have 0.001X of that, I would be very happy and most likely be doing something else rather than chatting here.

But about the "almost correction", I believe it hit 10% down on intraday. I did not sell, and even bought a bit. Don't think I will be setting a new personal high watermark anytime soon. The sectors I am in have not been doing well. Time to look elsewhere, or be patient? This is my own problem to solve.

PS. Umm... Make it 0.0001X Buffett's net worth, and I would be outta here.

__________________"Old age is the most unexpected of all things that can happen to a man" -- Leon Trotsky

-snip- What he has now, if I have 0.001X of that, I would be very happy and most likely be doing something else rather than chatting here.

-snip-
PS. Umm... Make it 0.0001X Buffett's net worth, and I would be outta here.

Interesting because I don't think I would be doing anything differently with $5M (if my math is right) as opposed to what I'm doing now. Heck am not sure even 10 times that amount would be much different but maybe it's just lack of imagination on my part...

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